Business Unusual for E&P: Companies Adapt to the Changing Landscape
Just a week before the World Petroleum Congress in Istanbul, Volvo announced that it will phase out its production of petrol and diesel cars from 2019. Several weeks before that, a famous energy futurist from Stanford University, Tony Seba, predicted the end of the oil industry by 2030. Working in an oil and gas company in 2017 and frequently hearing such news stories can certainly seem to be a cause for great concern. Thankfully, the ability to adapt is one of the oil and gas industry’s greatest strengths.
Obituaries for the industry have been written throughout its history, with numerous events, including peak oil theory, financial meltdowns, and the rise of renewables/green technologies seeming to signal its fall from global prominence. Despite this, however, the oil field resiliently dominates commodity markets. The industry is facing one of the toughest challenges of its lifetime, but exploration and production (E&P) companies are slowly and steadily adapting to the new changes.
A major shift to address the persistent decline of oil prices has been companies refocusing their finances on efficiency and profitability while taking an extremely long view. Companies are now divesting assets to bolster available funds in the short term and pay down debt incurred during the prolonged downturn. ConocoPhillips sold its oil sands and western Canadian natural gas assets, for example, to Cenovus Energy. Shell has reportedly been considering the sale of its interests in the super giant Majnoon and West Qurna fields in Iraq, where profit margins are low, the workforce has been drastically cut, and lingering concerns about the government’s ability to pay for projects plague regional confidence.
Many companies are divesting their assets in one region to shift capital elsewhere in expectation of increased/decreased activity: For example,
Apache recently sold its Canadian oil assets to Cardinal Energy.
Noble Energy struck a deal to sell its assets in the Marcellus Basin.
Chevron sold five fields in the Gulf of Mexico’s outer continental shelf and in Louisiana state waters to Cantium.
Mergers and Acquisitions
In addition to divestments, oil companies have sought to significantly expand their product and technology offerings through mergers and acquisitions (M&A). GE recently acquired Baker Hughes and merged it with GE Oil & Gas as BHGE to bring together Baker Hughes’ oilfield service capabilities with GE’s digital technology portfolio. Similarly, Shell acquired BG Group to dramatically enhance their gas business, obtain significant oil and gas reserves and production capabilities, and access undeveloped projects in new regions.
Oil and Natural Gas Corporation (ONGC), India’s biggest national oil company, is in talks to acquire Hindustan Petroleum Limited, a major downstream player in India, and Ensco recently acquired deepwater driller Atwood Oceanics to bolster its portfolio of floater and jackup assets and achieve new cost synergies. Such M&A activity across both service and operating companies could intensify in the near term as the downturn persists and the chance to consolidate and adapt becomes more appealing.
Other companies, backed by more capital and confident that a return to normalcy will be sooner than later, have increased their operational and capital expenditure. According to investment firm Edelweiss, the cost of production for offshore fields has nearly halved since 2014, which has presented some players with an opportunity to expand. Reliance Industries, partnering with BP, has recently decided to increase its investment in the deepwater KG basin in India, with other companies such as ONGC following suit. A report published in January by Barclays predicts a 7% rise in E&P spending in the near future, with expenditure increases in all parts of the world except Europe.
Exploring Low-Carbon Technologies
Companies have also been investing in low-carbon technologies for the past 2 years. France’s Total has implemented a plan that requires one-fifth of its asset base to be focused on low-carbon technologies and acquired a battery manufacturer to spearhead its efforts in electricity storage. Dong Energy, originally an oil and gas producer, is shifting its focus to renewable energy, using its legacy fossil fuel businesses to generate cash flow for the development of offshore wind farms. Shell has created a “new energies” division that brings together its hydrogen, biofuels, and electrical businesses and is entering the wind and solar sectors; this division will be supported by up to $1 billion in spending per year by 2020.
It has become apparent that simply ignoring the movement toward more sustainable energy production is not sufficient and that energy companies must slowly embrace change to remain competitive in the long term. To this end, energy giants such as BP, Chevron, Exxon, and Shell have expressed their support for the Paris Climate Accord and will seek new ways to combat rising carbon emissions.
Power of Digitization
E&P companies are also becoming more aware of the power of digitization, with automation and the Internet of Things increasing in importance alongside drilling and production. GE and NOV are developing digital programs that use field data from sensor packages, aggregated and analyzed with industrial data platforms, to predict equipment breakdowns before they occur. Some of GE’s programs are also aimed at expanding E&P efficiency in deepwater and offshore oil platforms, while NOV has commercially deployed the first system that uses downhole closed-loop drilling automation and surface process automation to optimize challenging well campaigns and differentiate rig fleets.
The E&P industry has hit a speed bump, but as long as oil and gas continue to be integral parts of global energy demand there will be a case for the E&P industry. It is worth noting that tough times are also one of the best times for course correction and disruption. A volatile economic climate can present an opportunity to focus on innovation and new development. As long as the industry continues to evolve to meet the challenges of the changing energy landscape, there is no need to press the panic button. The future of oil and gas is greener, affordable, and smarter.
Gaurav Dixit is a geochemist at Oil and Natural Gas Corp. (ONGC). He has a master’s degree in chemistry from the Indian Institute of Technology, Roorkee. He holds the Energy Risk Professional certification from Global Association of Risk Professionals. Dixit started his career working on rigs as a drilling fluid engineer and worked on India’s biggest drilling fluid recycling plant. He currently works in the R&D institute of ONGC, where his focus areas are unconventional resources and biomarkers. He has been an active member of SPE’s North India Chapter since 2014.
Stephen Forrester has worked at National Oilwell Varco (NOV) as a marketing/technical communications writer since 2014. His editorial interests at the company have largely centered on using surface and downhole data analytics to drive drilling optimization and closed-loop automation, though he is currently expanding his knowledge of additional product lines and technologies. Before joining NOV, Forrester worked at the oil and gas division of Lloyd’s Register as a technical editor of compliance inspection reports on subsea blowout preventers and related pressure-control equipment. He holds BA and MA degrees in English from the University of Houston and has been an SPE member for 2 years.
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04 September 2019
16 September 2019
16 September 2019